How to Avoid Audits and Penalties Assessed by the IRS

Filing taxes is an onerous process, and it is essential that you do it correctly.  The IRS is quite capable of selecting your tax return for an audit, and this can be an enormously stressful situation.  Taxes and audits are no fun, but there are a few things that you can do to help mitigate the situation.

First, your odds of being selected for an audit have actually increased, though the focus is primarily on high-income taxes, rather than middle class or low-income taxes.  There are also a few factors that increase your chances of being audited on your taxes.  Large charitable deductions, large business expenses, inaccurate reporting on your taxes, excessive itemization on your taxes, prior tax problems and complex investment transactions are all red flags for the IRS.

If you undergo an audit and it goes against you, you will have to pay penalties.  These can be very stiff and must be paid on top of your taxes.  The IRS can charge a 20% penalty on underpayments and disregard of IRS rules.  The IRS can also assess a 75% penalty for serious tax evasion issues and fraud.  In addition to these penalties and paying your taxes, you will also have to pay interest on both the penalties and the taxes owed.

Generally, though, the IRS will only audit your taxes if they see glaring errors and are sure that there will be a bill due to them.  It’s in their best interest to only audit where they are likely to get more money.